Legislature(1995 - 1996)
04/03/1996 03:55 PM Senate RES
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE
April 3, 1996
3:55 P.M.
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Drue Pearce, Vice Chairman
Senator Steve Frank
Senator Rick Halford
Senator Robin Taylor
Senator Georgianna Lincoln
MEMBERS ABSENT
Senator Lyman Hoffman
OTHER MEMBERS PRESENT
Representative Norman Rokeberg
Representative Joe Green
COMMITTEE CALENDAR
CS FOR HOUSE BILL NO. 357(RES)
"An Act relating to the issuance of hunting, trapping, and
noncommercial fishing licenses, tags, and permits and to residency
for fish and game purposes; and providing for an effective date."
HOUSE BILL NO. 329 am
"An Act providing for restitution to the state for the unlawful
taking of game."
SENATE BILL NO. 284
"An Act relating to the four dam pool transfer fund and the power
development fund."
SENATE BILL NO. 180
"An Act authorizing the commissioner of the Department of Natural
Resources to negotiate and enter into timber sale contracts that
provide for local manufacture of high value-added wood products;
and establishing an Alaska Forest Products Research and Marketing
Program within the Department of Commerce and Economic
Development."
SENATE BILL NO. 318
"An Act authorizing, approving, and ratifying the amendment of
North Star Unit oil and gas leases between the State of Alaska and
BP Exploration (Alaska) Inc.; and providing for an effective date."
PREVIOUS SENATE COMMITTEE ACTION
HB 357 - No previous action to consider.
HB 329 - No previous action to consider.
SB 284 - See Resources minutes dated 3/6/96.
SB 180 - See Resources minutes dated 2/21/96, and 3/8/96.
SB 318 - See Resources minutes dated 3/29/96 and 3/30/96.
WITNESS REGISTER
Linda Dahl, Staff
Representative Scott Ogan
State Capitol Bldg.
Juneau, AK 99801-1182
POSITION STATEMENT: Staff to sponsor of HB 357.
Captain Richard Graham
Division of Fish and Wildlife Protection
Department of Public Safety
5700 E. Tudor Rd.
Anchorage, AK 99507-1225
POSITION STATEMENT: Supported HB 357 and HB 329.
Representative Con Bunde
State Capitol Bldg.
Juneau, Alaska 99801-1182
POSITION STATEMENT: Sponsor of HB 329.
Anthony Crupi
Alaska Environmental Lobby
419 6th
Juneau, AK 99801
POSITION STATEMENT: Supported HB 329 with proposed amendments.
Randy Simmons
Alaska Industrial Development Authority
Department of Commerce and Economic Development
480 W. Tudor Rd.
Anchorage, AK 99503-6690
POSITION STATEMENT: Commented on SB 284.
Tom Boutin, Director
Division of Forestry
Department of Natural Resources
400 Willoughby Ave., 3rd Floor
Juneau, AK 99801-1724
POSITION STATEMENT: Supported SB 180.
Al Pagh
Four Star Lumber Co.
2849 Parks Hwy.
Fairbanks, AK 99709
POSITION STATEMENT: Commented on SB 180.
Phillip Tschersich
Alaska Environmental Lobby
419 6th
Juneau, AK 99801
POSITION STATEMENT: Commented on SB 180.
Eric Luttrell, Vice President
British Petroleum
POSITION STATEMENT: Commented on SB 318.
Ken Boyd, Director
Division of Oil and Gas
3601 C Street, #1380
Anchorage, AK 99503-5948
POSITION STATEMENT: Commented on SB 318.
Kevin Banks, Petroleum Economist
Department of Natural Resources
3601 C Street, #1380
Anchorage, AK 99503-5921
POSITION STATEMENT: Commented on SB 318.
John Shively, Commissioner
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Commented on SB 318.
Patrick Coughlin, Deputy Director
Division of Oil and Gas
Department of Natural Resources
3601 C Street, #1380
Anchorage, AK 99503-5948
POSITION STATEMENT: Commented on SB 318.
ACTION NARRATIVE
TAPE 96-45, SIDE A
Number 001
HB 357 FISH & GAME:LICENSES & RESIDENCY
CHAIRMAN LEMAN called the Senate Resources Committee meeting to
order at 3:55 p.m. and announced HB 357 to be up for consideration.
LINDA DAHL, Staff to Representative Scott Ogan, said HB 357
simplifies the enforcement of residency requirements for hunting,
trapping, and non-commercial fishing licenses. It will reduce the
number of non-residents who use loopholes in current State
residency laws to hunt trap and fish Alaska's resources.
MS. DAHL said this bill addresses the concerns of ADF&G, Department
of Law, and Department of Public Safety. The definition of
residency was separated into two separate subsections for
clarification purposes.
Passage of HB 357 could increase revenue annually by thousands of
dollars in relationship to current statistics of non-residents in
terms of licenses, game tags, and hunting fees for guides.
SENATOR LEMAN noted the problem they have is on page 2, lines 12 -
16 with the definition of who is a member of the military being
consistent within State statutes. MS. DAHL said they would work at
making it consistent.
SENATOR LEMAN asked her to work on it until next week and bring it
back to the committee as a CS.
SENATOR TAYLOR asked what was the purpose for the extensive
residency and domicile redefinitions within the bill. MS. DAHL
explained that the phrase "permanent place of abode" has been
deleted and replaced with "a person's domicile." The two main
reasons for this are requiring a permanent place of abode is unduly
restrictive and unnecessary to prevent non-residents from obtaining
resident privileges in the State. If a person is forced to move
from one location to another around the State due to their work
commitment they may not satisfy the residency requirement because
they have not maintained a permanent place of abode.
The second reason for this change is because the term "abode" is
not defined in statute. The lack of strict legal definition
creates enforcement problems. Black's Law Dictionary says that a
person may have two places of residence as in the city and the
country, but only one domicile. Residence means living in a
particular locality, but domicile means living in that locality
with intent to make it a fixed permanent home. They think that
replacing "a permanent place of abode" with "domicile" makes it
clearer that the legislature intended only those who are domiciled
in the State are entitle to residency and licensing.
SENATOR TAYLOR asked about the young people who had left the State
and are attending college. MS. DAHL replied she thought they would
be considered residents. SENATOR LEMAN thought the same.
CAPTAIN RICHARD GRAHAM, Division of Fish and Wildlife Protection,
said the guidelines under regulation say that people can travel to
and from the State and still maintain their fish and game
residency. They look at when they are out of State and what they
do to maintain their residency in the State during that time frame.
The Board's regulations allows them to look at licenses, voter
registration, maintaining property, household goods, where the
family is physically located; and it allows them to look at whether
or not the person has established residency or is receiving
residency privileges in another state, which is the one they look
at most closely.
SENATOR LEMAN said that was consistent with their intent.
CAPTAIN GRAHAM said they support the bill and he noted that they
added the U.S. Coast Guard to the list of military organizations to
which they extend certain residency and license privileges.
SENATOR TAYLOR commented that he thought that requiring people to
register to vote to then receive the benefit of a residency
classification might be violating their rights. He asked him to
work with Representative Ogan regarding his concerns with
university children, people who may be off on some mission or
volunteer work in Vista or the Peace Corps, and congressional
staff.
CAPTAIN GRAHAM asked if he wanted to expand certain job categories
to allow people residency privileges in another state or country as
well as keep their Alaska residency. SENATOR TAYLOR said he didn't
intend that at all. He didn't want to confuse the residency
definition.
SENATOR LEMAN asked if anyone else wanted to testify on HB 357. No
one responded and he said they would work on it and bring it up on
April 10.
HB 329 RESTITUTION FOR CERTAIN GAME VIOLATIONS
SENATOR LEMAN announced HB 329 to be up for consideration.
REPRESENTATIVE BUNDE, sponsor, said HB 329 allows for some
financial reimbursement to the State for our wildlife resources.
Current statutes have no compensation to the State for the loss of
the value of the wildlife resource involved in a crime. HB 329
provides a schedule of restitution for wildlife violators to repay
as a condition of sentencing.
SENATOR LEMAN said he hoped that they wouldn't be prosecuting in a
situation where a person accidentally takes an animal and notifies
ADF&G and then the game is donated to charity. REPRESENTATIVE
BUNDE said it was not his intention to make problems for people who
make reasonable mistakes and he thought that was covered with the
discretion of the arresting officer and certainly with the
discretion of the prosecutor as to whether it's a reasonable case
or not. Also the bill says "may be ordered to pay restitution."
The judge also has discretion.
SENATOR TAYLOR gave some examples of people he thought had been
wrongfully prosecuted and he thought these instances were not rare
and could be found in every community across the State. He thought
enforcement people frequently got overzealous in their efforts.
SENATOR LEMAN asked if the law differentiates between taking game
knowingly and unknowingly. REPRESENTATIVE BUNDE said that
ignorance is not an excuse and that applies in the law.
CAPTAIN GRAHAM said the Division of Fish and Wildlife Protection
supports this bill. He said they do have two classifications of
crimes, a misdemeanor which requires them to prove that a person
knowingly violated the law. The penalties are higher and there is
jail time. Then there is the strict liability regulation where
they do not have to consider the knowledge of the violator and the
penalties are substantially less and include no jail time.
SENATOR LEMAN said the intent of the bill was to get restitution to
the State for the animals illegally taken.
TAPE 96-45, SIDE B
Number 580
SENATOR LEMAN said it was the intent that the penalty isn't imposed
until after the criminal conviction is received and they would have
to see if additional language would be needed.
REPRESENTATIVE ROKEBERG said he was trying to get to the worst case
violators where knowledge would be a factor and asked if the
verbiage that he sent them would cover it. CAPTAIN GRAHAM replied
that it wouldn't, but it would be an all encompassing sentence they
sent simply restricting it to fish and game laws.
ANTHONY CRUPI, Alaska Environmental Lobby, said they support HB 329
with the proposed amendment because it provides restitution to the
State for illegal taking of its resources and discourages poaching.
He suggested putting a more equal value on Alaska's predators
because they are an essential part of the ecosystem structure.
SENATOR LEMAN asked if he thought it was inappropriate to apply
these penalties to someone who inadvertently killed a moose. MR.
CRUPI said he agreed with him and he thought Representative Bunde
had done a good job.
SENATOR LEMAN thanked everyone for their help and said they would
work on the CS and pass it out on next Wednesday.
SB 284 FOUR DAM POOL: RELATED FUNDS & BONDS
SENATOR LEMAN announced SB 284 to be up for consideration
RANDY SIMMONS, AIDA, said he was available to answer questions. He
said his letter addressed Senator Halford's concern with the
legality of entering into an agreement and they sent the committee
six different alternatives showing the cost and annual debt service
payment over different scenarios.
SENATOR LEMAN said he agreed with him that a maximum 10-year term
with a one year payment deferral would be the best alternative.
MR. SIMMONS replied that they have no reason to want to go longer
than 10 years. The only concern he has is that a lot of this is
market driven. He said they could report to Legislative Budget and
Audit, but they would like to have the flexibility.
SENATOR TAYLOR said the Four Dam Pool group indicated they wanted
no term longer than eight years. He didn't know what triggering
device would make certain that divestiture actually occurs other
than to leave the hammer of self help in the hands of the people
who would need it for the purposes of maintaining and repairing
their facilities. He said he would like to see something in there
that gives comfort to the Four Dam Pool communities that if the
State does not act in good faith and does attempt to just delay
this divestiture discussion, they will once again have those self
help rights.
MR. SIMMONS responded that this bill does allow them to exercise
their self help right for the amount that is not being used for the
debt service payment. Without the utilities agreeing that the
amount that needs to be set aside for the payment of the bond, they
would probably not be able to sell the bonds.
MR. SIMMONS said the utilities requested to go back to the table
for further negotiations and AIDA agreed. The utilities actually
asked to have the divestiture negotiations be put aside. Also the
term of the debt, whatever it may be, does not affect the utility
repairs at all. It may affect the citizens of Alaska, however.
They have had discussions about the length of the bond. In those
discussions they had to have a shorter term. They signed an
agreement, though, that allowed the term to be anywhere up to, but
no more than 25 years. Some members of the utility wanted a 25
year term because they felt if they actually did the divestiture
they might want to reserve the bonds.
They agree that the shorter time was best. Before they were to
float any bonds, members of the utilities will be consulted as part
of the agreement.
SENATOR TAYLOR said the agreement is centered around taking away
their self help right. The only thing he heard from members was
seven to eight years was plenty and they wanted to get it paid off
quickly. There is an impact on the rate payer to the extent that
we take money out of the Four Dam Pool stream and dedicate those
monies to the bond reimbursement. Those monies are not available
to go back into the Four Dam Pool Transfer Fund (Southeast Energy
Fund). He wanted to see divestiture expedited or he wanted some
assurances that divestiture would occur or this legislation goes
away.
MR. SIMMONS responded that the problem with waiting for divestiture
means that the repairs won't happen this year because there are a
lot of property transfers that have to take place which would take
from 12 to 18 months during which nothing could be done.
SENATOR TAYLOR said that was not correct because even without a
bill, self help is still available giving them $11 million worth of
resources which is more than they are intending to put forward in
this construction season on the repairs. They could exercise their
self help clause and do the repairs.
MR. SIMMONS said with bonds they would have most of the repairs
done this construction season. With self help they would have to
do the repairs over a two to three year period.
SENATOR TAYLOR said he wanted to make sure that all alternatives
were considered including power cost equalization.
Number 212
SENATOR TAYLOR asked if the divestiture plan they have provides
funding for PCE out of the income stream they receive? MR. SIMMONS
said it didn't; and that is a decision made by the Governor and the
Legislature.
MR. SIMMONS said that the State was willing to go back to the table
and negotiate.
SENATOR TAYLOR said he had to see something that would show him
that closure will occur within this process in a given period of
time. He wanted it to be fully understood that at the end of the
time if divestiture does not occur that the full opportunity of
self help comes in.
MR. SIMMONS said he wanted to make it clear that they are not
taking the self help right away from the utilities. All they want
the utilities to do is to limit their right to the amount of bond
payments only. They still have their self help right up to $7
million per year.
SENATOR LEMAN said he wanted to work on amendments to the bill
before moving it from committee.
SB 180 VALUE-ADDED TIMBER SALES; MARKETING
Number 80
SENATOR LEMAN announced SB 180 to be up for consideration.
TOM BOUTIN, Director, Division of Forestry, urged the committee to
pass this bill. It was requested by some small mill operators both
in the Interior and Southeast. It's a tool they don't now have and
there are some situations now up in the Tanana Valley where some
people have mills and want to add equipment so they can market
lumber in Fairbanks.
MR. BOUTIN said in the past 12 months they have offered more timber
than they have offered in any two years in the past decade. At the
same time they did a record amount of reforestation and did a
record number of Forest Practices inspections. They offered 27
million of bark beetle kill timber on the Kenai which have been
sold. They initiated a timber sale program for the Mental Health
Trust Unit. There is a timber sale in the Copper River area.
TAPE 96-46, SIDE A
Number 001
MR. BOUTIN said that the classification of land has to be taken
into account with the use of State land. A classification process
must be followed for every timber sale and it hasn't been
prohibitive. It protects the State so it doesn't get too far ahead
of the public in offering timber sales.
SENATOR TAYLOR said he was concerned that while it may not be an
impediment in some areas that we are going to be making forestry
decisions based on pollsters and politicians and not what's the
greatest benefit to the people of Alaska and to the forest itself.
He was also concerned that enough timber is not being offered,
especially of diseased trees.
MR. BOUTIN said the Division of Forestry has offered more beetle
kill timber in the last 18 months than all other public owners put
together.
SENATOR TAYLOR encouraged him to make additional recommendations
for specific areas as a professional so the legislature could
assist him if they could. MR. BOUTIN replied that there are things
in the bill that don't bring an impediment or a cost to the way
they do business, but they might arguably give one more piece of
assurance to the part of the public that isn't sure about what they
are doing and he thought that was good value.
SENATOR FRANK said he supported this bill because he hoped the
Governor would become more comfortable with responsible timber
harvest. He thought that even though the bill is modest, that if
it doesn't pass, the people who depend on the forest who could be
helped by this bill won't be helped at all. He thought that only
through the process of experience will the harvest ever be
increased.
AL PAGH said he and his son own and operated the Four Star Lumber
Company. He is also chairman of the Interior Alaska Forest
Association. On page 9, line 1 a subsidy reduction is mentioned
and he said he didn't know of anyone in the logging industry
asking for a subsidy. He said they need a more reliable long term
supply of lumber and most importantly they need a market for hard
woods and pulp logs.
On page 2, line 7, there is a limit of two contracts per year per
region for three years for up to 10 million board feet, but the
State Constitution states that any renewable resource be managed on
a sustained yield basis.
Page 3, line 26 he had a concern [the recording was indistinct at
this point]. On page 4, line 4, giving the Commissioner the power
to cancel a contract if it conflicts with a Forest Land Use Plan,
he said he didn't know of anyone who would make an investment of
any size with a condition like that.
On page 4, line 15 - a purchaser may not be a party to more than
one contract under this section at any one time - would not allow
cooperative efforts.
He recommended that the products list be deleted. The priority
should go using logs that are currently valueless.
Number 412
SENATOR TAYLOR asked him to send his comments to the committee.
MR. PAGH said he already sent them letters.
SENATOR TAYLOR asked why chipping for pulp purposes wouldn't be
adequate under the current regulations in Fairbanks. MR. BOUTIN
explained that they had four different proposed regulations on
January 4. The ones Mr. Pagh is talking about were regulations
pursuant to HB 121 which exempts salvage sales from the requirement
that they be in the five year schedule for the two prior years.
There had been talk and understandings that there would be
regulations written and they talked with people in the industry and
anyone they could think of to see what kind of regulations they
could come up with for HB 121. They decided if timber was going to
deteriorate within the next two years such that it would no longer
be suitable for lumber or veneer, that would qualify as a salvage
sale and hence not have to be in the five-year schedule. So much of
the State's timber is only pulp quality; never was lumber or veneer
quality and perhaps never will be. It would seem like including
pulp wood in the regulation would be reasonable, but if you put in
pulp wood, that's the whole spectrum. So they might not have a
regulation.
They have also decided to drop the debt to equity ratio for changes
in the Schnabel law. They also got rid of the 50-year or older
preference for beach log salvage, MR. BOUTIN said. There is an
exemption in the Forest Practices Act to exempt salvage sales from
reforestation. That applies to all ownerships, but the State, as
a matter of policy, reforests all of its salvage sales.
Private landowners asked the Division what is a salvage sale for
purposes of exempting them from reforestation. So they are going
back to the drawing board on that. Yet it looks too complicated to
everyone and there weren't a lot of comments from the environmental
community so they modified that regulation. They haven't received
advice, yet, as to whether they go out to the public again or
whether they take the modifications and talk to the people they
concern.
MR. PAGH commented that it didn't make any difference as long as
there was a use for the lumber and he didn't know why it had to go
through a five year plan to get on a salvage sale.
SENATOR TAYLOR said the legislature's intent was to get value out
of the forest resource whatever the product was. MR. BOUTIN is
working within the directive to make sure timber can't be used for
any other purpose before it is offered at a salvage sale. He would
encourage the Department to remove the regulation concerning
products.
MR. BOUTIN commented that the public relies on the five-year
schedules as being the one place - and it is the only place - where
they can know they are looking at our entire timber sale program
for that area. They can see all the sales and get an idea of all
the impact. The public needs to be assured that the five-year
schedule shows all the sales, that the State is not playing around.
Number 550
SENATOR TAYLOR asked Mr. Pagh if he heard there would be a change
in the definition so that logs salvaged under the salvage sales
could be put into chips for pulp. MR. PAGH said he heard about the
changes in the regulations they want to put forth. MR. BOUTIN
explained that rather than putting pulp in, they are talking about
just not having regulations for AS38.05.117.
PHILLIP TSCHERSICH, Alaska Environmental Lobby, said they support
the concepts behind the original legislation, but they have
concerns with the present form. The changes made in the CS ignore
the recommendations of the Board of Forestry and depart from the
original intent of the bill which is to establish and sustain the
operation of small scale, local, timber processing that would
produce high value added finished wood products in order to
maximize the opportunities for jobs and minimize the impact on fish
and wildlife habitat.
Their major concerns are that 10 years is too long for negotiated
contract limits. Resource policy decisions rather than protracted
contract obligations should drive forest management. Value added
operators in the Interior have indicated that they need
approximately a three year guaranteed supply of timber in order to
acquire loans.
A large portion of the trees should remain in state for processing.
Allowing the Commissioner to stipulate how much timber undergoes
high value added processing allows leeway above and beyond the
original language which required at least 50 percent of the timber
should undergo high value added processing in state.
Some products were added to the high value added products that
should qualify. They also feel that 10 million board feet is too
large for a negotiated contract. The Board of Forestry recommended
5 million board feet per year. Also, logging levels need to be
determined on a specific regional basis. There should be a limit
on the number of contracts per region.
In conclusion, MR. TSCHERSICH said, they recommend readopting the
original SB 180.
TAPE 96-46, SIDE B
Number 580
SENATOR TAYLOR asked what information he had to reach a conclusion
that pulp is not a high value added product. MR. TSCHERSICH
replied that the amount of processing required to produce pulp is
not in keeping with the original intent of the bill as given by the
Governor that high value added products would be finished products
such as cabinetry. He thought that while using pulp for medical
purposes was admirable, it did not contribute much to the dollar
value.
SENATOR TAYLOR said it takes far fewer people to cut down a tree,
dry it, mill it, and make a violin out of it. To take the same
tree and run it through the process so it turns into a rayon dress
or a product that 10,000 lbs. is needed every time it's used takes
a tremendous amount of capital and human investment. There is no
higher amount of labor intensity that you can put into a product
than making dissolving cellulose pulp out of it.
MR. TSCHERSICH replied that if rayon production was an industry in
the State and if the Challenger did launch out of the State of
Alaska, if these industries were in place and employing Alaskans,
they would see this in a different lite. As it is, pulp products
are exported far before any downstream manufacturing would take
place. Therefore, in state processing is still a low value
product.
SENATOR TAYLOR said the world price on pulp right, up until a few
months ago, is the highest it's ever been. And the log you use for
pulp, you couldn't make a violin out of; it isn't good for anything
else. The trees he's talking about are bug kill and burned trees,
not pristine forest. He thinks that pulp is high value.
MR. TSCHERSICH said SB 180 has its merit in trying to develop high
value added product industries in the Interior and they are
supporting that aspect of the legislation.
SENATOR TAYLOR commented that the only concept being discussed in
this legislation is the word salvage. The first and primary
objective is that the people of the State need to salvage those
resources that have been decimated either by fire or by bug
infestation. If it's not salvaged, it's lost for all of us.
SENATOR LEMAN announced a recess at 6:20 p.m.
TAPE 96-47, SIDE A
SENATOR LEMAN called the meeting back to order at 7:07 p.m.
SB 318 NORTH STAR OIL & GAS LEASE AMENDMENT
CHAIRMAN LEMAN:
Let's call the Resources Committee back to order and we're
going to take up SB 318, the Northstar agreement. As I announced
earlier, tonight's meeting, which I expect to be completed by 9:00,
will be for British Petroleum to present the Northstar Development
Plan and schedules and then any questions that we may have on the
materials that we distributed that BP provided and if we have time
for any follow up questions from the first two meetings we had.
I understand, Mr. Luttrell, that you're the man of the hour.
Please join us. Ready, please proceed. Representative Green, if
you would like to join us at the table, take your chance at any of
these places and if the members show up, we're just going to ask
you shift to another spot. But I think there's a good chance that
all of us who will be attending are in the room and you're welcome
to join us at our table and you can have a cookie.
SENATOR PEARCE:
He can come to the table if he quits calling us the dark side
on the floor of the House - a momentary lapse.
CHAIRMAN LEMAN:
The dark side, did you really say that?
REPRESENTATIVE GREEN:
It was a momentary lapse, because it's vernacular, but it
meant no disrespect.
ERIC LUTTRELL, Vice President, Exploration and Development, BP:
Mr. Chairman, my name is Eric Luttrell and I'm the Vice
President of Exploration and Development for BP and I'm happy to be
here tonight to talk about our plans for the development of
Northstar. You have in front of you a series of slides that we
might walk through just to give you a sense of what we plan to do
to bring Northstar to production.
Just a little bit by way of background - on the first display,
there, it talks about the project itself. As we've discussed
before, Northstar is a fully appraised field. There are four wells
that are capable of production on the structure. We believe the
field has about 130 million barrels of reserves. We see a very
high well rates, well in the range of 7,000 barrels per day of high
quality oil, the highest quality oil on the North Slope.
Northstar is a field that lies about six miles north of
Prudhoe Bay. As you know, BP has about 98 percent of this field
with 2 percent belonging to Murphy Oil and Gas and a partial
interest in one of the federal leases.
You know a lot about the State lease terms which are 20
percent and the federal lease terms are 1/6 royalties.
The next line talks about the existing plan of development
between BP and the Department of Natural Resources - an agreement
which we reached last April, a three year plan and development in
which we were obligated to do several things. But the three key
items in that plan of development are a 3-D seismic program to be
acquired this summer, an updated reservoir description by the end
of this year, and detailed development scenarios by 1998. The 3-D
seismic, we're about to let the contract. We've picked a
contractor. We're in negotiation with them. It's something which
we believe is absolutely essential for the development of the
field. It's not essential for the appraisal of the field. We want
to make sure we pick our development locations properly. The
reservoir description is in progress and we will have no problem
completing it. Development scenarios are also in progress and will
probably be done long before the required time. We fully expect to
meet the requirements of the plan of development for the Northstar
joint federal/State unit.
In the line of the development scenarios, we have looked at a
large number of scenarios with our partners, VECO Corporation and
Natchiq Corporation which is a subsidiary of ASRC and we now
visualize a stand alone facility located on an expanded Seal Island
which is the island in the east side of the field with a field life
on the order of 15 years with a plateau rate of about 50,000
barrels a day and somewhere on the order of 25 wells. That's
really dependent upon how successful they are in maintaining
pressure. Certainly not all of those wells will be production
wells. Some of them will be pressure maintenance wells.
If you skip over one slide for just a minute and look at a
picture of the facilities, I apologize for the quality of that
picture. I thought this slide was in our Juneau office, but it
wasn't so I had it faxed down, but I think you can get a picture of
what we see the island looking like - a relatively square island.
The bottom side is drilling facilities, the ball mill is where
would grind the materials for reinjection of the cuttings. In the
middle of the island would be the processing facilities where we
would separate the oil and the gas and the water. Off to the
middle of the side there's a dock for us to load and unload
material. On the top there would be fuel storage on the left and
quarters on the right of the top and other shops that have living
areas. The helipad is on the top of the living quarters. I also
see a flare to the lower left and the crude oil line to onshore
coming off on the right. The point of the slide is to say
basically we have a fairly mature idea of what we think the island
is going to look like and what kind of facilities we expect to put
on there, how we have to manage the island. This is a product of
our conceptual engineering phase which you will see later on and
it's now complete. And what we're doing now is preliminary
engineering which is basically trying to draw all the processing
facilities in a way that we can actually build them in an effective
way.
Then if you go on to the previous slide, you'll see a picture
of how we see the expenditures and how we see the production. This
is a very typical slide that we use inside of BP. We talk about
when are we going to spend money, how much are we going to spend,
and then what are we going to see in terms of a production profile.
You see BP intends to spend upward of $100 million in '97 and '98
and somewhat less in 1999 to put in the pipeline, to build the
facilities, and do the drilling, extending on into 2001. From that
we expect to see a fairly quick ramp up to about 50,000 barrels a
day starting early in 1999, a plateau in about two to two and a
half, three years, and then a long decline lasting out into the
year 2011 or 2012. It's hard to predict at this point in time
exactly when it would take place.
Now, in order to get to that point, the next slide talks about
our development schedule and it has the key components that we're
managing as we go to development of this field. Obviously the
first things that's important to us are the regulatory permits and
the key permit there actually is the EIS study. That is ongoing as
we speak. We hope that will be done just after the first of the
year. That will help us to go forward effectively.
The next line is the conceptual engineering or design process.
That was the process that we did with our Alaskan partners of VECO
and Natchiq. That is now complete.
The next item says Exco approval as basically some of you may
know, I did go over to London early in March and got approval from
BP to go forward with this project subject to legislative approval.
It shows the legislative agreement, the process we're currently in.
We're also currently in the process of preliminary engineering
where we're doing the detailed drawings that will allow us to
effectively cost this project out at a higher quality level. That
will get us to the July/August time frame - what we call a class 2
cost estimate. With that class 2 cost estimate I can now go to BP
and get the official sanction which is shown as the next item
there.
You can see the seismic program showing there in August,
September, October of 1996 and a similar block of time in 1997.
Because of the ice conditions in the Northstar area, we have to
plan to do this over two seasons because we might not be able to
get the seismic this year. We will have a contract...we should be
shooting seismic somewhere on the slope this year in the open
water. It shows there two seasons because it might take us two
seasons to get done.
The next line talks about fabrication and construction. The
key short term objective there is the modification of the island
which we plan to do next spring. And that is the critical path
right now. If we fail to get the EIS permits in time, that will
affect our ability to do that. We have been working the
contingency plans, but there actually is a bottleneck in the system
is the island construction in the spring of 1997. We will also be
ordering equipment and begin the fabrication of the modules here in
early 1997 and that will extend across into 1998. You would see a
loadout in the summer of 1998 and taking the materials to the Slope
and installation on the island. So that fabrication, construction,
installation is that long bar there.
Once the island is armored, then we can actually put the
drilling rig on there which we would intend to do in the summer of
1997 and begin to predrill the field. And the drilling obviously
goes out into the 2000s.
We show here a startup by this aggressive schedule early in
1999. I expect to have a somewhat better date on the start up by
the time we get the sanction this fall, but it's certainly that
kind of timing we would see - maybe as early as the very late 1998
which we currently show right at that time window.
Looking at that project, then, on the next line we look at the
costs associated with that and the costs are now broken into
several components - the cost of the island, the cost of the
pipeline, the cost of the facilities, the cost of the engineering,
drilling, and sort of everything else lumped into a pile.
You see there a total cost for our current view of Northstar
of about $350 million in the development phase and how much money
is being spent on buying imported materials, things like pipe,
compressors, and valves, etc. and how much is being done,
contractor costs, and you can see of the contractor costs the
amount of that is being placed in Alaska in aggregate we think the
contractor component is about 70 - 75 percent. So this is a
project which is dominantly Alaskan.
You can see on the next page a sense of the Alaskan content.
We think the Alaska spend is going to be somewhere between $210 -
$250 million out of the $350 and that gets you a number of 60 or 65
percent of the total program or 80 or 85 percent, if you exclude
the inherently imported materials.
Alaska fabrication is actually an important part to us. My
staff and their partners and we have now expanded our lines. We
now have AIC in our lines and our engineering contractor is really
working in our office in Anchorage. There's about 18 of them
working there and there's some other contract engineering work
being done elsewhere. Working effectively to design the facilities
so they can be efficiently and effectively fabricated in the State
of Alaska. Our commitment as part of the agreement with DNR is to
substantially increase the content of Alaska fabrication. In the
past we have built a number of small modules, truckable modules in
the State of Alaska, and this will be the first time that any
company has built large modules and aggregated them into
megamodules in the State of Alaska.
Basically that slide simply says that we will do that and we
will find a way to do that and it will actually have a pretty big
effect on Alaska industry. My conversations with our partners,
VECO and Natchiq suggest they believe when we are done with this,
they will be able to prove to all Alaskans that they can
effectively compete for the building of modules and so we're
actually developing a business here which could have considerable
longevity.
The last slide says that as a requirement that commitment be
made for a port assembly yard. I think that was a concern we had
several weeks ago. We now think that concern is lesser. We're
pretty sure we can assemble this in the port. We haven't actually
got all the contracts and agreements, but we're pretty sure it can
be done. Our main concern now is to make sure the fabrication
facilities in the City of Anchorage can handle both Northstar and
the other material they would be pushing through those facilities
in '97 and '98. And that's sort of shown on the last slide because
the two fabrication facilities in Anchorage have been working at
1,000 - 1,200 tons a year at an ongoing basis building modules for
the oil industry and you can see that Northstar is going to be a
substantial change to that. And it's something we're managing with
our contractors to make sure we don't get ourselves in the
situation where they can't deliver on time and we get ourselves in
a time box. It's a process which is being effectively managed.
So that's a sense of where we are. I don't know what else the
Committee would like to know about our development plans. I'm here
to answer any questions.
CHAIRMAN LEMAN:
I'd like to start the questions tonight by going through what
you've just done. I have a number of questions I think would be
good to help clarify. Let's stick with the presentation first and
then go back to some general questions and if we have time, some
follow ups on the other. I want to end at nine and then if we need
to, we'll pick up at another time.
Representative Rokeberg, Chairman of the House Oil and Gas
Committee, you're welcome to join us at the table. If you'd like
to sit back there, you're welcome to and there are cookies or
brownies that you can have or offer them to others. Just trying to
make you comfortable.
Go back to the very first chart where it says project
description. This term, fully appraised, is that a term of art,
what does it mean, in terms of confidence limits. Does it mean 90
- 95 percent?
MR. LUTTRELL:
This is a term we would use inside BP which simply says we've
done enough work in the subsurface that we know how big the field
is and we would not believe any more work would need to be done in
terms of drilling wells or shooting seismic.
CHAIRMAN LEMAN:
In terms of confidence limits you don't place a number on it?
MR. LUTTRELL:
No, there is no number we would place on it.
CHAIRMAN LEMAN:
How does this well productivity of 7,000 barrels a day per
well compare with a typical well at Endicott?
MR. LUTTRELL:
It's substantially better than a typical well at Endicott. I
don't know the numbers, but I would thing the yearly well's were in
the 3 - 4,000 range.
CHAIRMAN LEMAN:
That's what I was remembering something around 4,000.
MR. LUTTRELL:
This is actually not quite as good as Prudhoe, but I think the
wells are probably capable of producing like some of the early
Prudhoe wells, but we will choke them back to manage the reservoir
pressure. So I think those wells will be capable of 10 or 15 when
you get started, but we won't pull at that rate.
CHAIRMAN LEMAN:
Are there any more questions from others on that first page?
Second page.
SENATOR FRANK:
Just let me ask a question. Does that mean there won't be an
ELF applied?
MR. LUTTRELL:
There will be an ELF. In fact the severance rate's going to
be over 8 percent in the beginning part of the field because of the
high flow rates of the wells.
SENATOR FRANK:
I thought the ELF limited the tax as opposed ...it depends on
how you look at it, I suppose.
MR. LUTTRELL:
There will be a severance tax on this field is the simple way
of looking at it.
CHAIRMAN LEMAN:
It would be higher than that if ELF had been one.
MR. LUTTRELL:
I think the ELF number is actually .7 as I recall the number.
SENATOR FRANK:
What's severance tax - 12 or 15.
MR. LUTTRELL:
Fifteen.
SENATOR FRANK:
So these are not, just to digress for a second to refresh my
memory, what would a well have to be, both a well and field, isn't
it?
MR. LUTTRELL:
It's a well and field number so we're paying about as much as
you can on a per well basis, but we're not paying on a field basis
because it's affecting very large fields and very high flow rates.
CHAIRMAN LEMAN:
That exponential is at 150,000, if you remember. The
secondary exponent - you remember how to solve that?
SENATOR FRANK:
I tried to work it out one time and I thought I understood it,
but I certainly....
MR. LUTTRELL:
We've all tried to work it out one time and thought we
understood it.
CHAIRMAN LEMAN:
Next page - plan and development. Under the key items in
planning and development - updated reservoir description. If
you're not drilling additional wells, what are you doing to update
the reservoir description. What's the basis for this updating.
MR. LUTTRELL:
Mr. Chairman, when we acquired the field we didn't know very
much about it. We actually got a bunch of data in a box from
Amerada and from Shell and we felt it was important for us to do a
lot of work studying that from both a geoscience point of view and
a reservoir engineering point of view and that has actually evolved
with time. So we now have a pretty good idea with a high level of
confidence what the reserves are. When we bought it, we
effectively only had a sort of a low level quality estimate of the
reserves. This is actually work we would normally do to ensure we
have reduced the uncertainty on reserves and production as much as
possible.
CHAIRMAN LEMAN:
It is pretty much office work?
MR. LUTTRELL:
It is office work, yes.
CHAIRMAN LEMAN:
The next part, the detailed development scenarios by first
quarter '98. That's two years from now. You said the field is
delineated. What is it that requires almost two more years to
continue.
MR. LUTTRELL:
Now I have to think back as to why the agreement was made that
way. Basically what we're trying to do is say we agree by that
time to have reviewed how we would develop it and convey those
scenarios to the State. What you see in the following pieces of
paper essentially, we've already gone through that process and now
decided on the most effective way to develop. When we have to do
it effectively, that job is now done.
CHAIRMAN LEMAN:
Are there other questions on this page? Development plans.
Spent oil facility. Assume based on this and what I see on the, I
guess, the way you presented it would have been on the next slide,
but on mine it's two more down, suggest that there would be a stand
alone facility. Do you mean that you will process oil and gas on
site.
MR. LUTTRELL:
That's correct.
CHAIRMAN LEMAN:
What if you decide to go to, what would it be, Prudhoe Bay, I
guess, and pipe in and process there. How would that affect the
economics.
MR. LUTTRELL:
We carried early on scenarios which allowed us to decide
economically whether it would be feasible to go to Prudhoe Bay, to
Endicott, to Milne Point, and to Lisborne. About three months ago
we chose to eliminate Milne Point, Endicott, and Lisborne and
entered into a conversation with Prudhoe Bay about the possibility
of them processing for us. The amount of money you save is
relatively modest, and therefore, the amount of processing fee we
could pay to make the economics similar is quite small. We are now
convinced we will not be able to reach agreement with Prudhoe Bay,
a number they would agree to and process at Prudhoe Bay. So we're
actually now planning to do a stand alone. Does that answer your
question?
CHAIRMAN LEMAN:
Yeah, I guess, just knowing that you've looked at it. I just
wanted to know if there was going to be any substantial difference
and if so, how is that going to affect the economics of ... you
know, you've got to look at costs when you're coming up with your
deal, and if it's a substantial difference, then I would like to
know what that would be.
MR. LUTTRELL:
As I said a moment ago, Mr. Chairman, the cost difference is
actually modest. And that's simply says it drives down the fee you
can afford to pay to make it economically equal, so...is that
helping or not?
CHAIRMAN LEMAN:
Just before you ask that question, Gene and Mark, you're
welcome to come to the table. This space is for anybody who has
not called the Senate the dark side, or if they have, they've
apologized. Representative Green has apologized.
MR. LUTTRELL:
Let me answer on one more part of that question. We actually
needed to make that decision relatively early, because unless you
make that part of your development plan as we go into preliminary
engineering, we simply have to decide. So we informed Prudhoe Bay
that we did a decision by April 1, and we have, so far, not got
into an agreement with them, so it's moving on.
CHAIRMAN LEMAN:
And there will become a time very soon when it's going to be
too late to turn back on that one.
Representative Green.
REPRESENTATIVE GREEN:
Thank you, Mr. Chairman. Eric, does that mean that you will
actually pipeline to PS 1, or will you join some other pipeline if
the oil is pipeline quality.
MR. LUTTRELL:
It's my understanding, Representative Green, is that we will
take the oil by pipeline to either Westock or Point Storkelson, put
it on VSMs, and then ultimately get into the VSM parts of PBU, but
go to PS 1. It would simply go across the area of Prudhoe Bay, but
not be part of their infrastructure.
CHAIRMAN LEMAN:
Further questions on this slide? Okay, production and capital
expenditures. We went through this -- it appeared some
inconsistencies from what's on here with some of the other charts
in terms of some of the timings, and I just wanted to point out
some of these things. If you look at the time lines, up at the top
it says development schedules -- a couple of more sheets in -- you
probably have that ...
MR LUTTRELL:
Yep, I have that.
CHAIRMAN LEMAN:
Okay. The pipeline and facility construction is shown before
the detailed development scenario is completed, correct?
MR. LUTTRELL:
I don't know what chart you are on now, so you'll have to help
me there.
The pipeline will be something that we will be working on --
I think they're going to do that, as I recall, in the winter of
'97-98. They want to do it on the ice, that would be the winter
they would do it.
CHAIRMAN LEMAN:
I'm not following this. You know, you can make notes to
yourself and then ...
REPRESENTATIVE GREEN:
On that same issue. I think if you look at the diamond and
start up on the development schedule, it shows the first quarter of
'99 and the production chart shows the middle of '98.
MR. LUTTRELL:
Well, that's an artifact way the particular diagram was drawn.
It actually should be starting up on 119 in a vertical line. It's
difficult to do this with the graphic program that we're using.
Visualize that line is essentially vertical off on the ordinate of
'98-99.
REPRESENTATIVE GREEN:
That answered my question I was going to follow with that you
aren't going to try and make it up or anything.
MR. LUTTRELL:
No, it will start up and because we'll have enough well
capacity we'll start out at 50,000 a day.
CHAIRMAN LEMAN:
Okay, well let me try another one. It appears that pipeline
construction begins -- on this chart if you look at the production
and cap ex, first quarter of '97 -- I guess that's best as I can
read ...
MR. LUTTRELL:
Well, it shows, I believe, Mr. Chairman, that there is
expenditure in '97 and '98. There's no quarters shown on that
graph. If you were to see the one in color, you would see a color
bar for pipeline in '97 and "98. That simply means that in that
winter we would be spending that money.
CHAIRMAN LEMAN:
Okay, then if you look at the other chart, the development
schedule, permitting is completed at the end of the third quarter
of '97.
MR. LUTTRELL:
That's correct.
CHAIRMAN LEMAN:
So I assume that your pipeline permitting is going to be
completed some time before that.
MR. LUTTRELL:
In advance of that, yes. The critical element of the
permitting is the EIS. Once that EIS is done, then the other
permits are reasonably easy to obtain.
CHAIRMAN LEMAN:
Okay, what is the significance of this reference to the
Department of Revenue estimate of the first Northstar production in
the year 2002?
MR. LUTTRELL:
It simply points out that if you look at the Department of
Revenue forecast for the state of Alaska, they've assumed that
Northstar would come on in 2002, and it just simply shows that what
we're proposing to do will accelerate that by three years.
CHAIRMAN LEMAN:
Okay, do you know what the basis was for that estimate when
they made that?
MR. LUTTRELL:
Mr. Chairman, I do not.
CHAIRMAN LEMAN:
Okay, we'll ask that question of somebody else. Any further
questions of this sheet?
Representative Green.
REPRESENTATIVE GREEN:
Thank you, Mr. Chairman. Eric, you show a peak or a truncate
peak at 50,000 barrels a day. Has there been any discussions or
work effort with the AOGCC as far as EMER for this might be.
MR. LUTTRELL:
We have begun the conversation with AOGCC. The answer to that
question is I don't think we have done that yet, no.
REPRESENTATIVE GREEN:
Would that have any impact if for some strange reason that we
can't foresee that they would truncate that at something less.
Would that adversely affect your project.
MR. LUTTRELL:
If they dropped it to 25,000 barrels a day, it would, but if
you're talking about 5,000 barrel a day, I don't think it will have
an effect.
CHAIRMAN LEMAN:
The next page of mine is the chart showing the island
facilities. This is when it starts getting interesting, the
engineering drawings.
MR. LUTTRELL:
I wish, actually, it was a hard quality one, and I endeavor to
get the committee a higher quality, I apologize for it.
CHAIRMAN LEMAN:
This seems to me -- I was trying to figure out here the
orientation of the main oil line to shore, which would suggest to
me that if north is up, then it should be this way, and that's with
this north arrow, but then it says wind, and northeast would be
that direction, but I'm not sure why it says wind there.
MR. LUTTRELL:
I think the wind is on there to think about where the flare
is, but I think the orientation is about like this, which would be
consistent with the pipeline going due south towards the field.
CHAIRMAN LEMAN:
So the wind is typically coming from southwest, then? Is
that...
MR. LUTTRELL:
Now you're into....I don't really know the answer to.
CHAIRMAN LEMAN:
What I really wanted to ask is slope protection. Is that only
going to be on that one corner or is it all around.
MR. LUTTRELL:
It's all the way around.
CHAIRMAN LEMAN:
Next one, development schedule. This one is the one that
interests me. The legislative agreement you're showing, starting
in the first of February and going until about the first of May.
Did you suggest to DNR that we ought to see this about the first of
February?
MR. LUTTRELL:
Let's say that some of us had stretched objectives that it
would show up earlier than it did.
CHAIRMAN LEMAN:
So this chart was probably done...
MR. LUTTRELL:
It has a history to it... several versions.
CHAIRMAN LEMAN:
On seismic, I think you went through that earlier. The couple
of events...I think that's open water. What do you do, tow drogues
and set off explosions and take measurements?
MR. LUTTRELL:
What we're going to do is actually is marine 3-D, but we're
not going to tow like you would in the Gulf of Mexico. We're going
to use bottom cable. We'll put the geophones on the bottom and
move the boats over the top of them. It actually is a much more
effective way to do it in the shallow water we have. It also
minimizes the impact on the modest floating ice that might be
there. It's a fairly well established practice. We will not use an
explosion. It will be air guns.
CHAIRMAN LEMAN:
When is the Anchorage to Northstar sea lift?
MR. LUTTRELL:
The sea lift would be in the summer of 1998.
CHAIRMAN LEMAN:
Next page, preliminary costs, pipeline, $28 million. I assume
that will be a common carrier pipeline and there will be a tariff
association with it.
MR. LUTTRELL:
It is my understanding it will be a common carrier pipeline.
CHAIRMAN LEMAN:
Do you have any thoughts on what the estimated dollars per
barrel tariff will be for that?
MR. LUTTRELL:
I asked Daryl Clipin who works for me as commercial manager
that question. He says it's about like the Endicott pipeline.
It's a modest sum. I can get that for you.
SENATOR FRANK:
That's interesting to me, too.
CHAIRMAN LEMAN:
We're not expecting you to know everything tonight. You're
doing a good job.
SENATOR FRANK:
What's the approximate capital cost of that pipeline?
MR. LUTTRELL:
That is the capital cost of the pipeline - about $28 million.
CHAIRMAN LEMAN:
Alaska fabrication - I'm interested in what this means down
here. It says, "requires commitment to port assembly by mid-year
1996. Now that's three months from now. What is this commitment,
who makes it, what's required, is it going to take State bucks,
loan guarantees, whatever...
MR. LUTTRELL:
I read this through before I came in here and I would have
changed that slide, but I think what we were concerned about was
our ability to fabricate at the port and load out. I know this was
a concern of Mr. Morgan when he was here last week and it was a
concern for those of you who are in the briefing in the Governor's
office. What we've discovered is that does not seem to be as big
a concern as we had thought. We're pretty sure now that we can in
fact fabricate and assemble the modules in the port and load them
out. Now there's some other work we're doing there, but I'm not
convinced this is a big problem. But, this is a slide which is
about two weeks old. It did say at that time we had to be assured
it could be done. Otherwise we had a problem with what we were
planning to do.
CHAIRMAN LEMAN:
Are your contractors in fabrication going to be able to use,
if they use the port of Anchorage area, be able to do that - build
whatever facilities they need within the contract prices or are
they going to be looking for infrastructure assistance.
MR. LUTTRELL:
I can't speak for them, but my sense is they are not going to
be seeking infrastructure expenses.
CHAIRMAN LEMAN:
Anyone else have questions on this? Senator Taylor.
SENATOR TAYLOR
What size acreage do you need for your assembly?
MR. LUTTRELL:
Rather than quote you a number, I'd like to come back and give
you the information. I can get that from my engineers tomorrow.
SENATOR TAYLOR
I only wanted you to be aware that we have a mill site for the
assembly - flat land with an already developed deep water dock. It
has Gantry cranes with a rail mounting. It's all paved and is
surrounded by warehouses. Sitka is probably acres and we've got a
couple of other facilities. Ketchikan Marine maintenance facility
- we might as well use it for fabricating something. I can't get
a ferry boat to stop there, so...
CHAIRMAN LEMAN:
We've got a lot of Knik Arm silt and Bootlegger Cove mud and
other things...
SENATOR TAYLOR
That's very delicate and it's going to take an engineering
permit to build that and an environmental impact statement, an Army
Corps of Engineers permit to build that and it would take a long
time. I've got friends at DEC.
REPRESENTATIVE GREEN:
Eric, you know last year when I toured the port facility they
were talking about moving one of the big modular containers to the
north end of what is now developed and then opening up that middle
area. Do you anticipate that this fa yard would be in there or
what I'm wondering about is if it's on the undeveloped portion,
then you have to come all the way back through all that mess.
MR. LUTTRELL:
It's my understanding, Representative Green, that we'll
actually use the Lynden dock or some part associated with Lynden
dock and not go to the actual port facilities further to the north.
It actually is better for what we need. We're doing some boring
studies to make sure it can support the weight, but we're pretty
sure it can and then we would use that dock and that load out
facility. Basically, we now have to negotiate with Lynden and
their neighbors to do that, but I think it's achievable.
SENATOR TAYLOR
If they charge you too much, come and see us. The nice part
is southeast has much milder winters and you can work outside a lot
longer.
SENATOR FRANK:
Now, are these modules ones that have been done in Seattle or
Louisiana or where do they get done?
MR. LUTTRELL:
Historically, modules have been built in a variety of
different places, but the image I think people have, is building a
large module of this sort in New Iberia and dragging it through the
Panama Canal and taking it up around Barrow. New Iberia is a port
in Louisiana where a lot of stuff is built for the oil industry.
There's actually been modules built in Portland, Souther
California, I think in the L.A. area, as well as New Iberia and in
Canada.
SENATOR FRANK:
So it isn't implausible to be serious about Senator Taylor's
idea. It could be done down here and sea lifted up there or
whatever. It wouldn't be a technical problem, it would be a cost
problem or something.
MR. LUTTRELL:
Let me answer your question directly, Senator Frank, one of
the advantages of using the port is that the fabrication facilities
of the skids, the parts of the modules you've built somewhere else,
actually are in Anchorage. So, it's most convenient to take those
skids and move them six miles to the north in to the port and
assemble them into a mega-module. If we were to do what Senator
Taylor suggested, we would have to build those in Anchorage and
then load them on a boat and take them to some other site and then
construct them and then load them on a boat again. It's that
double handling that would make life difficult.
SENATOR FRANK:
Where do those things come from in the first place?
MR. LUTTRELL:
They're fabricated. Basically, we bring in pipes and
structural steel and actually build a processing facility or a
utility facility in series of boxes which we call skids. That's
what's being built in the two existing facilities in Anchorage.
CHAIRMAN LEMAN:
Back to this commitment by mid-year, or whatever you want to
call it. I'd like to understand how you make commitments and yet
your board according to your schedule is not going to make a
decision until October provided the legislature approves this. So
you have some kind of a process where you can make commitments
ahead of the ultimate commitment on a go for this project?
MR. LUTTRELL:
Mr. Chairman, there is an official process in BP called
sanction. We can actually not go to sanction without having a
class II cost estimate which we will not have until mid-summer.
The managing director of BP, Mr. Chase, for whom I work has
reviewed this with the Board and the Board is comfortable with him
making a commitment to develop in Alaska before we go to sanction.
We have an agreement that should the legislature ratify this
agreement, we are committed to developing this field.
CHAIRMAN LEMAN:
One of the concerns expressed in the first meeting were these
words here, "potentially 75 percent could be fabricated in Alaska,"
and if we go back to the agreement, there's a whole bunch of words
like that. Whenever they crop up it kind of makes us sit up and
say what are you saying. I know there's probably some decisions
that have to be made and some things have to happen for that to
happen. I guess I'd like to know what is your commitment to these
things happening and what do you think really is the risk of them
not happening.
MR. LUTTRELL:
Let me just address the word "potentially" because I think
since we haven't actually finalized the final design, I don't know
whether the number is 65 or 68 or 72 or 75, that's part of the
sense of it potentially. Our commitment is to design the facility
such that it can be largely built in Alaska and that's the process
we're currently in and that's what my engineers have sort of
marching orders. We have no sense here of trying to design a
facility which can be built in multiple places. We're designing
the facility to be built here.
CHAIRMAN LEMAN:
Is Chris Cox still with you in Anchorage?
MR. LUTTRELL:
Mr. Cox has taken a job with us in Australia. So, he died and
went to heaven we claim. He has a chance to work in Melbourne.
That's the garden spot of BP.
CHAIRMAN LEMAN:
O.K., general questions. I'm going to ask a few questions you
can help us with. Mr. Morgan in the first meeting said, "The net
profit leases create a very basic misalignment between the leasing
company and the State. Once the net profit interest cut in...
TAPE 96-47, SIDE B
CHAIRMAN LEMAN:
...In the case of Northstar, some 90 percent of the revenue
stream to the company would effectively dry up and that would lead
to the premature shut down of the field. There's no question"
closed quote. Under the net profit leasing regulations, wouldn't
BP be encouraged to continue production by those provisions which
allow recovery of BP's late fuel life investments with interest?
The net profit share leasing system allows for those future
investments to also be recovered. Is that not correct?
MR. LUTTRELL:
The answer to the question, Mr. Chairman is that the way that
net profits works. Your profit would therefore be limited to
prime. I don't believe any major company would invest monies to
make the prime rate of return. That's the reason we would not make
late life investments under those conditions.
CHAIRMAN LEMAN:
It would seem to me that you would get prime return on the
investment plus eight percent return. That would be your share of
the profit. Is that...
MR. LUTTRELL:
Mr. Chairman, I think I know where your going, but I...
CHAIRMAN LEMAN:
On questions like this I don't mind kicking to you and you can
get back to us on it.
MR. LUTTRELL:
Is the question, what would be the rate of return of late life
investments in the field? Is that the question?
CHAIRMAN LEMAN:
Yeah, and I'm just trying to get to this issue of the
misalignment to make sure that I understand it. I understand how,
you know, you need to be motivated by making money all the way
through and returning your money and making sure in late life,
where you're trying to get out of the ground what's in there. You
wanna be motivated to get that out, I understand that. But, I just
wanna make sure I understand this net profit share leasing and why
-- and try to understand this misalignment.
MR. LUTTRELL:
Typically, late life investments have actually relatively
handsome rates of return because you have some much of the
infrastructure already in place.
CHAIRMAN LEMAN:
Well, we'd be happy to take a more handsome rate up front
and...
MR. LUTTRELL:
You are getting a more handsome rate up front, actually.
CHAIRMAN LEMAN:
Maybe. Senator Frank, you had a question on this.
SENATOR FRANK:
Yeah, the rate of return on the additional investment and its
always prime, is that it? It's always prime.
MR. LUTTRELL:
It works out that way because, because as you get to late life
effectively you put the money in and you're just earning interest
on the time.
SENATOR FRANK:
I mean, but that's what the...
MR. LUTTRELL:
I will get back with a precise number...
SENATOR FRANK:
I know they told us that prior investment was at prime and I
understand that. And I can understand what you're saying. I'm not
sure that you just take the -- I don't know where you came up with
eight percent.
CHAIRMAN LEMAN:
Well, if they're paying 92 percent to the state, the eight
percent is what's remaining. And it would seem to me that it would
be eight over prime, but I...
SENATOR FRANK:
It doesn't, I don't think you -- you're kinda adding apples
and oranges there because you could have a that remaining eight
percent of the net profit that's available to the company may or
may not -- I mean compared to the investment is what you'd have to
do. You'd have to take that, you'd take that net profit and for a
year and divide it by the investment to get a return on investment.
The eight percent would be on top of that prime, would be on top of
that I assume. I don't know.
MR. LUTTRELL:
I think the simple thing to do is...
SENATOR FRANK:
I don't know.
MR. LUTTRELL:
...we can go back and get a very simple calculation and bring
it in and show it to you which I rather do than let us sit here
speculating as to what this number would be.
CHAIRMAN LEMAN:
In the interest of time...
SENATOR FRANK:
Then it depends on how you look at the recovered cost of
capital. If you've recovered all your capital, you might have an
infinite, not that you'd look at it this way, you might have an
infinite rate of return because you'd have no [indisc.]...
MR. LUTTRELL:
We do have operating costs on late life too which we have to
remember to count.
SENATOR FRANK:
Yeah, but those come out before you calculate net profits.
MR. LUTTRELL:
It's still expenses.
CHAIRMAN LEMAN:
Those, see those all come off first. Well, we're gonna learn
how net profit share works. We're gonna get walked through it. It
doesn't the development account reactivate to offset a reduced net
profit share payments when a lessee makes additional investments to
prolong production late in the field life.
MR. LUTTRELL:
This is the same question.
CHAIRMAN LEMAN:
Okay, I'll sort the March 29th hearing -- Mr. Morgan responded
to a question by Senator Frank concerning BP's net profit bidding
elsewhere by saying: as far as I know we haven't ever bid in any
other part of the world, ever, on an arrangement like the net
profit arrangement in Alaska and of course, we did not bid on that
here. This is a point of clarification. Didn't BP testify that it
competitively bid against other companies for the Northstar leases?
I think there were others interested in these leases and so there
was...
MR. LUTTRELL:
I think that what Mr. Morgan was saying, Mr. Chairman, was
that we did not bid in the lease sale.
CHAIRMAN LEMAN:
Right.
SENATOR FRANK:
In the original one.
MR. LUTTRELL:
In the original lease sale for Northstar leases.
CHAIRMAN LEMAN:
In discussing BP's recent net profit arrangement in
Venezuela, Morgan testified: I think I can assure you this was not
an arrangement where there was the sudden imposition someway
through the development of a field of different terms that altered
the basic economics. He offered to discuss the details of the
Venezuelan arrangement at some future time with the committee. And
I don't know if you're prepared to talk about that.
MR. LUTTRELL:
As you know, Mr. Chairman, we did submit answers to your
question. In those answers there was a four paragraph ?rep? about
Venezuela.
CHAIRMAN LEMAN:
I remember reading...
MR. LUTTRELL:
...talk about that or respond to whatever question you want.
CHAIRMAN LEMAN:
Okay, aren't all net profit arrangements in one form or
another some sort of arrangement where the terms change after
development costs are recovered? Essentially, being deals where
the financial terms change to the royalty owner's advantage at some
point in the development of the field.
MR. LUTTRELL:
That's a question I don't know how to answer yes or no to
because I don't know all net profits terms. If you're speaking to
Venezuela, Venezuela is not a net profits arrangement. It is
simply a tax and royalty arrangement which has been portrayed in
the press as being net profits, but I think they're using the word
net profits differently than you are in the legal sense of Alaska.
CHAIRMAN LEMAN:
Maybe sometime you can explain us the differences between
those arrangements in Venezuela and the...
MR. LUTTRELL:
Is the note not clear?
CHAIRMAN LEMAN:
In your response?
MR. LUTTRELL:
Yes.
CHAIRMAN LEMAN:
I'll look at it. If there's further questions, we'll go to
round two on that one.
MR. LUTTRELL:
We're prepared to make it as clear as possible.
CHAIRMAN LEMAN:
Okay. In an effort to differentiate the effects of profit
sharing arrangements in Alaska versus those in Venezuela, Mr.
Morgan noted that Venezuela is an extremely low cost area in terms
of finding development and transportation costs. And that
certainly distinguishes it from our activities on the North Slope.
I note however, that in the case of Northstar there, at least in
terms for you, there are no finding costs. And that was somebody
else's investment. Well, I guess we don't know cause you haven't
told us yet.
MR. LUTTRELL:
Can I put something in for correction, so you understand the
distinction here? We would consider any cost done before sanction
as a finding cost. It is an internal, an internal in actually how
it's characterized as the industry reports itself through the SEC.
So the cost that we've incurred and we will have incurred on the,
on Northstar in advance of our sanction date would be called
finding cost. Now we didn't actually spend any money to find it,
but those would be called finding costs.
CHAIRMAN LEMAN:
All that engineering and the field work...
MR. LUTTRELL:
Office work we're doing and the three...
CHAIRMAN LEMAN:
...as defined for the legislature. Anyway, your record that
you gave to us reflect, shows that the estimated development costs
are $2.92 per barrel. And the primary transportation system taps
is just six miles away from the Prudhoe Bay unit. And the question
is under these circumstances, do you believe that developing your
Venezuelan properties would be less costly than developing the
Northstar unit?
MR. LUTTRELL:
All I can tell you, Mr. Chairman, is what my compadres in
Venezuela have told as to what their FND and transportation and
lifting cost numbers are and I'm sure they received the same level
of scrutiny by the BP board as mine would've so their numbers are
exceedingly much smaller than ours.
CHAIRMAN LEMAN:
Smaller than 2.92. I guess you showed me something on a
chart, didn't...
SENATOR FRANK:
Mr. Chairman.
CHAIRMAN LEMAN:
Senator Frank.
SENATOR FRANK:
It seems like those arguments, I don't want to be argumentive
or anything, but it seems like those arguments about cost
comparisons between Alaska and Venezuela or anywhere else would
have more relevance to what our underlying royalty ought to be
rather than the effects of a net profits arrangement because a net
profits assumes that you've recovered all your costs. And if
you've recovered all your costs in Venezuela and you've recovered
all your costs in Alaska, then you start paying net profits after
that. And so it seems like, you kind of with the net profits --
and I'm not arguing for it, but it seems like just on a financial
standpoint you kinda of taking away the, you know, the elements
that are different between the two and then you're left with
operating costs after recovering full, full -- excuse me, profits
after operating costs and after recovery of capital costs, what
you've got left here versus what you'd have left there. It seems
like you'd kinda be in a percentage basis seems like you'd be kinda
comparable.
MR. LUTTRELL:
Both Alaska and Venezuela are tax and royalty systems. They
do not in Venezuela have net profits terms. The bid that was made
recently by many oil companies in the Venezuelan sale was a bid for
a thing called a peg [ph] which I don't know the Spanish words for,
but effectively is a supplemental royalty. And the companies then
bid that they would pay the state a supplemental royalty. And I
think in the case of our property, of additional 50 percent. And
we were able to do that in our economics because of the very, very,
very low cost of finding and developing and operating the fields
there. Obviously, if they had cost like ours in Alaska, they would
not have been able to bid a number that high and still make a
profit. It's just, it's simple economics. We put a certain amount
of money in and we get a certain amount of money out and that
becomes an economic venture. The state of Venezuela obviously, is
was able to negotiate some very attractive terms for them in
getting a very large piece of the pie. But had their costs been,
you know total costs been in the range $7 a barrel like they are in
Alaska then they would not have been able to command that big,
large piece of the pie.
CHAIRMAN LEMAN:
Mr. Morgan also stated that the net profit interest
arrangements that were in place here are not profit related. Can
you explain why BP does not believe that the state's net profit
terms are profit related?
MR. LUTTRELL:
Well, Mr. Chairman, I think what he was trying to say was that
the context of the question had to do with the recommendation and
the Oil & Gas Policy Council that the state should move towards
profit related taxes. In our view, the profit related taxes are
ones that when the profit goes up on a annual basis the income of
the state goes up on an annual basis. And under those
circumstances, the net profits all coming at one time in the life
of the field do misalign and therefore, they're not the kind of
profit related taxes that I think would attract industry to the
State of Alaska. That's why we think the supplemental royalty
actually is more akin to the profit related taxes that were
proposed in the Oil & Gas Policy Council because as our profits
goes up as proxy and by the oil price, the state's take goes up.
CHAIRMAN LEMAN:
When DNR was drafting the state's net profit leasing
regulations, it's my understanding that industry was actively
involved in that process. Do you know if BP was or participated in
the rule-making process and commented on the draft regulations?
MR. LUTTRELL:
I do not know. I could probably find out, that's some almost
20 years ago now.
CHAIRMAN LEMAN:
Right and I don't know the answer to that either, but I've...
MR. LUTTRELL:
Probably all those people are...
CHAIRMAN LEMAN:
Ken, do you know?
KEN BOYD:
[indisc.] we don't Mr. Chairman.
SENATOR TAYLO R
I guess, I've read through your explanation of Venezuela a
couple times, but focusing on Alaska. You say comparable costs in
Alaska - lifting and transportation are about $7 a barrel. Then
you go on to say in Alaska we look to make 3.25 per barrel on a
capital investment of 3.50 or above per barrel, a .94 ratio. Isn't
that about a hundred percent, I mean of profit? I mean if I'm
manufacturing wigets, and it cost me $3.50 to manufacture each
wiget and I sale it for $7, isn't that a...
MR. LUTTRELL:
Senator, I understand your question and I think that the
analogy we were trying to draw there does not get to the conclusion
you're trying to reach there. Your conclusion, as you said it is,
is not incorrect. But what we're simply trying to say is to give
you a comparable of what our income versus our capital in Venezuela
looks like relative to our income versus capital here in Alaska.
SENATOR TAYLOR
I understood that ratio comparing because of the large volume
that you expect to recover and a lower net or a lower profit that
you expect to recover, but also at a lower cost. And I can
understand the volume factors, but that didn't look like too bad a
return to me, I mean.
MR. LUTTRELL:
The point of the illustration was to simply say that they are
comparable to Venezuela.
SENATOR TAYLOR
In fact, Venezuela is a little [indisc.]
MR. LUTTRELL:
Better. Venezuela is a little better. I know that when I
talked to Mr. Chase, he said anytime I can get a Venezuela deal
I'll take it.
SENATOR TAYLOR
Till they nationalize you [indisc.]...
CHAIRMAN LEMAN:
We won't nationalize you.
SENATOR TAYLOR
I don't know.
SENATOR FRANK:
You know, this is kinda interesting. This statement here
says, in Alaska we look to make about 3.25 per barrel on a capital
investment of about 3.50. Now is that 3.25 an annual, that's a per
barrel thing so that's...
MR. LUTTRELL:
That's a sort of a aggregate real number.
SENATOR FRANK:
Okay, so I know -- I mean to me I would say well that means
your making 94 percent return on your investment annually. Now I
know that if I looked up your information that's Standard & Poor's
or whatever, they wouldn't say BP is making a return on equity of
94 percent. I know they wouldn't say that because your stock would
be selling for a much higher multiple if it was.
SENATOR TAYLOR
I figure it's spread over the life of the field.
MR. LUTTRELL:
Yeah, it's spread over -- it's the same question he's asking.
SENATOR FRANK:
Well, if it's spread out over the life of the field, you
wouldn't spend 3.20 or you wouldn't spend 3.50 to get 3.25 back;
would you?
SENATOR TAYLOR
No, no they're spending...
SENATOR FRANK:
On top of your
MR. LUTTRELL:
I'm spending 3.50 up front and I get that production over a 15
year period and each year I make that, about that much out of each
barrel I sell. So, you can't actually make the mathematical
construct that you're trying to make. We are making a handsome
profit on both of these deals.
SENATOR TAYLOR
So are we.
UNIDENTIFIED SPEAKER:
So are you.
CHAIRMAN LEMAN:
Senator Frank, we're starting to feel sorry for you, it's
looking like you're loosing money and it's probably gonna see if we
can cut you in the capital budget.
SENATOR FRANK:
Well, it's just clear that I don't understand. That's the
only thing I'm clear about now.
SENATOR TAYLOR
I guess we could always take the Governor's deal and sweeten
it a little bit.
CHAIRMAN LEMAN:
And ask for [indisc.], whatever that's called. Okay, I'm
gonna go back to -- I just have a few more on this, this area. Did
you ever provide testimony, and there again this has been a ways
back so you made need to get back to us on this, ever prior
testimony or formerly communicate with the Department of Natural
Resources your view that the leasing provisions were not profit
related before 1979 and 1982 when you successfully bid on the net
profit sharing, share leases you own in Duck Island in Point
Thompson?
MR. LUTTRELL:
A pretty complicated question, maybe you ought to write it
down so I can understand it.
CHAIRMAN LEMAN:
Okay. [indisc.]
MR. LUTTRELL:
If you provide me a written I'll get you a response.
CHAIRMAN LEMAN:
I'll give it to you. Last week, Mr. Morgan referred to the
substitution of a supplemental royalty as negotiated in this new
agreement, as very much closer to a profit related arrangement. He
also said, very clearly the oil price is a strong proxy for the
profitability of an oil fields operation. I think back to last
year's hearings on HB 207 and it seems like the primary reason the
commissioner needed flexibility to lower royalties was that they
were not sensitive to profit. In fact, I believe there was
testimony to the effect that both royalties and severance taxes
were regressive. Question: how can a supplemental royalty based
on the movement of oil prices be considered to be a profit related
arrangement late in field life or anytime in field life, for that
matter, if the royalty rate you have to pay bears no relationship
to your cost of continued operation?
MR. LUTTRELL:
We, we run our economics, Mr. Chairman, with the 20 percent
base royalty and we believe that under most price conditions we can
make this field work. Obviously, it gets down in that $10 range
I'm not quite sure what's gonna happen. We look that when the
price goes above something which is say $16 or $17, I guess we
actually agreed $17.35, then the fact there would be additional
profit from the field that we would be willing to share with the
state and that was the agreement that we reached. And it simply
rather than going through a long involved process of actually
establishing profit and taxing profit, we thought this was a simple
proxy to do. It simply said, we know when price goes up we're
gonna make money, when the price goes down we're actually gonna
carry the burden of it and we were willing to share with the state
then the profits that are related to the price range. That's how
we set the supplemental royalty. I don't know if I answered your
question or not.
CHAIRMAN LEMAN:
If on this topic, cause if you can just hold it I wanna, I
just wanna clear of this one series of questions. We were told
last year that high royalties will lead to the premature
abandonment of oil fields. And yet, in this agreement you have a
high royalty rate, I mean, then you say in the agreement that
you're not going to seek royalty reduction. I mean, it seems to me
there may be some inconsistency there that maybe we're not going to
see it for 15 years, but at some time in the future it would seem
to me a good business decision would be to come knocking on the
door and say, hey, you know we've got this field and we've been
paying according to these terms, but if we can get some royalty
adjustment we can get this much more out of the field. Then,
whoever is commissioner at the time, is gonna go back and say,
well, you said you'd never seek it. But you know, and at that time
it would seem - it might even be a good move. And then you say,
we'll shut it in and the state says well, we better make some
adjustments. Doesn't that hold true for this project also?
MR. LUTTRELL:
It's hard for me to look that far into the future, but I think
your supposition is correct. There might be a circumstance at the
end of the field life that might find it to the advantage of the
state and the company to change the royalty, I don't know.
Certainly, our commitment to no change in royalty was one we made
early on to Commissioner Shively. He wanted specifically for us to
articulate that we would not seek 207 relief for this field. And
we felt that we could do that and we did do that. And that's what
those words are about.
CHAIRMAN LEMAN:
And realistically that commitment, as far as your concerned,
is it an indefinite commitment or about how many years would you
say that's good for. I mean, can you...
MR. LUTTRELL:
It's an indefinite commitment.
CHAIRMAN LEMAN:
You have no plans to change that, although it's possible you
might at some time in the future, but. Okay. Go ahead.
SENATOR TAYLOR
Did I note also in the Venezuela deal that their government
owned enterprise was going to kick in 35% of the cost?
MR. LUTTRELL:
Senator Taylor that is correct. The Petovesa [ph], which is
the Petrolista [ph] Venezuela Company has the right to acquire 35%
of the fields that would be discovered in the block that we bought,
the Guarapichi [ph] Block, in fact all of the blocks that were
licensed recently. We expect eventually that they would exercise
that right. But if they do so, they actually have to pay past cost
and ongoing cost. They would be a full, working interest down
there.
SENATOR TAYLOR
Plus prime, right? That's what it said.
MR. LUTTRELL:
Plus the prime of the past costs.
SENATOR TAYLOR
Yes, that was my question. And in fact, that's something I
suggested last year during 207, that I thought that it was
something that the state should start taking a serious look at if
we're going to insist upon these joint venture approaches that
maybe we ought to put our money where our mouth is and join in the
risk. I didn't see a big rush to do that, but normally--
MR. LUTTRELL:
The Alaska National Oil Company, is that right?
SENATOR TAYLOR
I'm willing to do her. I want to know what the inside
information is and be part owner of this thing, I don't want to see
the profits going all to somebody else, and us has to be painted as
the bad guys in there taxing it. I'd just as soon see us as joint
venture, as this is supposed to be some sort socialistic, wholly-
owned state up here, the "we own the ranch" garbage. Well, if
we're going to own the ranch, maybe we ought to do something with
somebody on the ranch. Obviously it worked for Venezuela.
MR. LUTTRELL
You don't actually expect me to respond to this question, do
you?
SENATOR TAYLOR
I don't imagine Venezuela's doing that because they're losing
money at it. I don't see anybody jumping to go do it, but--
CHAIRMAN LEMAN:
Last question I have, maybe we might even get DNR back up
here, we can move on, unless we want to quit for tonight.
SENATOR HALFORD:
I gotta quit pretty quick.
CHAIRMAN LEMAN:
You gotta quit? In Mr. Morgan's comments last week, and I've
talked about some of this in the hallway with you today, he said,
"We depend on our reputation in doing our business around the
world, and we would not be prepared as BP to enter into an
arrangement to develop an oil field in the knowledge that we would
be going forward on a basis that we would prematurely shut in oil
in that oil field." I guess before I ask this question, I just
want you to clarify what Mr. Morgan meant when he was talking about
the reputation of BP in the world. He said, "We want to protect
that reputation." You told me earlier today what that meant, but
just the rest of the committee members and others hear that
explanation, what did he mean?
MR. LUTTRELL:
Well, when we talked about earlier today, I think the best way
to describe it is to put yourself, any one of you, in the position
of being in government, or actually probably a member of the public
in the year 2010, when the net profits were to kick in, if they
were to kick in, and BP would feel compelled to shut in the field.
The question is, "What would you feel, what would be your
reaction?" I postulate the reaction would be one of outrage, "You
mean we've actually done all this, and now when it gets to be our
turn to make money, you shut the damn thing in?" I think that is
the reaction that people would have, and we simply didn't feel as
though that would be appropriate for BP to do, and we would not put
ourselves in the circumstance where the state and the population
would be outraged at our action. That is the reputation issue.
CHAIRMAN LEMAN:
This briefing book that DNR prepared I note, and this is
something that we've talked about a little before, that BP owns
Alaska Division of Lands Lease third-312828, a lease which contains
about 25% of the oil in the Endicott Field. That lease was bought
in 1979, in which all but one of the Northstar leases were sold.
Same sale. It carries a 79.59% net profit share, which is a little
bit less than Northstar, and a 20% royalty. Question: how can your
decision to go forward with development in Endicott under these
terms be reconciled with your unwillingness to proceed at Northstar
without the change.
MR. LUTTRELL:
Well I think there's two things that you need to know: number
one, when we developed Endicott, we actually didn't ever anticipate
getting to net profits. And you can see the information we
provided you earlier yesterday about the development costs at
Endicott was actually probably relatively high. We actually now,
it might actually sometime occur in the future. I've actually
talked to the Endicott folks and asked them the specific question,
and the answer is because it's only one of a number of leases,
effectively we would continue to operate the field and the other
leases would effectively carry the profit of this one lease. Now,
I do want to mention something that's complicating there is because
at Endicott, the various leases are owned by different companies,
and what's happening right now as we speak, is that different
companies have different economic interests because their future
profitability looks different, and it's already beginning to affect
development plans at Endicott, the fact that we have misalignment
between the various parties. Now in this case, it's misalignment
between the various owners, and not the state, but misalignment is
the kind of misalignment we were talking about previously. But we
would continue to operate.
SENATOR FRANK:
Did you say that you didn't, at the time you made the
investment in Endicott, you didn't anticipate getting to a net
profit situation?
MR. LUTTRELL:
It is my understanding they did not anticipate getting to
that.
SENATOR FRANK:
So, that would indicate that you were willing to do it for
prime, then, or what am I missing?
MR. LUTTRELL:
It's a complicated question, Senator Frank, having to do with
some cost in forward-looking economics and development accounts and
time and all that kind of stuff. You're right in saying what
you're saying, is that it sounds like, overall, BP didn't
anticipate making very much money in that that they could release.
That is correct. Those costs, when they're past, were sunk, and
we're only talking about future investments.
CHAIRMAN LEMAN:
Joe?
REPRESENTATIVE JOE GREEN :
Thank you, Mr. Chairman. There was a significant difference
too, in that there were some pretty high exploration costs involved
in that also entered into this [indsc.], so that exploration costs
made it as much as ten years earlier, we're accumulating this
[indsc.].
MR. LUTTRELL:
No, but Senator Frank's question is actually correct, because
in a full-cycle basis, BP wasn't going to make very much money on
this. But it made it's decision on a money-forward basis at that
point in time.
[Several people speak at the same time for a short while, and it
cannot be determined what any of them are saying.]
SENATOR FRANK:
But when did you make the decision to lease the properties,
though, I think is what Senator Leman was getting at on a net
profits basis was the decision that I think he was wondering about.
Didn't you make that decision to bid on that lease before you had
done much in the way of, I don't know about exploration, do explore
before you bid on a lease?
MR. LUTTRELL:
Senator Frank, I'm going to give you an answer, but I'm going
to give it with great caution. I believe that Endicott was
reasonably well understood when that lease bid was made, I don't
know that for a fact. There was some exploration in the area prior
to that lease.
SENATOR FRANK:
But you had no sunk cost at that point?
MR. LUTTRELL:
Now I can't do this without having a better sense of what took
place [indsc.].
SENATOR FRANK:
Not like this case, where you've got this, well in this case
it's $300,000,000.00 without having actually paid, but 1% or 2% of
it or whatever, so--
SENATOR TAYLOR
Whatever, we don't know that number. Yet.
SENATOR FRANK:
But I still think that's irrelevant. If the question's
relevant, then I don't understand the answer.
CHAIRMAN LEMAN:
Further questions of Mr. Luttrell?
UNIDENTIFIED SPEAKER:
I've gotta go, Mr. Chairman.
CHAIRMAN LEMAN:
You've gotta go?
UNIDENTIFIED SPEAKER:
Yeah.
CHAIRMAN LEMAN:
I'm trying to decide if I want to capture Commissioner Shively
while he's here. Are you going to be back at any time? Do you
want to go for a few minutes?
SENATOR TAYLOR
I don't have to go, but I'm tired. I might want to go.
CHAIRMAN LEMAN:
John, why don't you come join us at the table, you're welcome
to stay here. After 8:00 we get informal here. Sometimes even
earlier than that.
SENATOR TAYLOR
And we're just hitting five hours, right?
CHAIRMAN LEMAN:
Yeah, I know. That cookie gave me a shot of sugar; I've got
a little more energy. Now, John, in your overview of the proposed
amendments you testified that the longer the development is
delayed, the less money the state is going to get in net profits
and indicated the timing of development was critical to you as the
department negotiated the deal. And you confirmed that today in
our hallway talk. My question is, if you're concerned about the
need to hasten the development, and thus avoid the continued growth
of the development account, or at least retard its' growth, why
didn't your department insist on a firm commitment that it would
develop Northstar before agreeing to extend the unit another three
years?
COMMISSIONER SHIVELY:
Mr. Chairman, I can't totally answer that. First of all,
there are two questions: one I think that people have raised,
should we have even allowed BP to take over the leases from Amerada
Hess, I think that's a question that's been raised. That happened
before I was commissioner, and while I think in the transition I
think it happened, in January of 95', and while Mr. Eason was the
director of the Division of Oil & Gas, and I think the answer is
that it's pretty common when you have one company wanting to look
at another--take another shot at an oil field, to do that, I mean
that's what we've traditionally done. I think that also you have
to look at the fact that both--that we didn't understand the
economics of that field in the spring of last year, the way we
understand it now. In fact BP didn't understand the economics of
that field when they bought it. What we knew about the field at
the time that we did that three-year development plan was that
there was less oil than people had hoped, by a significant amount
in some ways, and that the last number we saw for developing the
field was $1,500,000,000.00. We did believe, I think, or at least
the Division of Oil & Gas, that we were bringing in a company that
had far more experience on the slope that could look at those
development costs and bring them down, and that provided an
opportunity. If we had all the information in the spring of last
year that we had today, we might have made another decision; we did
not have that information.
CHAIRMAN LEMAN:
And when did you get that, during the course of these
negotiations?
COMMISSIONER SHIVELY:
It was during the course of the negotiations, yes sir.
CHAIRMAN LEMAN:
Was there ever any discussion within your department about
requiring such a commitment from BP before you extended it, or at
that time it was pretty speculative?
COMMISSIONER SHIVELY:
Mr. Chairman, those discussions, to my recollection, did not
reach my level. They were done as most development plans are, in
the Division of Oil & Gas. The professionals in that staff made
that decision.
CHAIRMAN LEMAN:
You recall, if I can ask the question here Ken, if those
discussions took place?
KEN BOYD, DIRECTOR, DIVISION OF OIL & GAS, DEPARTMENT OF NATURAL
RESOURCES:
Yes, Mr. Chairman. For the record, my name is Ken Boyd, I'm
the director of the Division of Oil & Gas. The discussion, as I
recall, centered around getting the field developed, you know, what
we're going to do to move the field forward. We had a new owner,
we'd done the assignments, and I had a couple of concerns. One
concern concerned the southern lease, the fifth lease, the fact
that a well had been drilled there that had not met expectations,
the well is still confidential, and what they were going to do
about that. I said you will do this through the seismic program,
third quarter this year, or provide other information so that's on
the lease. I wasn't looking to waste time. 3-D seismic survey in
my view is something BP will be able use later on in field
development to not drill stupid wells. We all knew what the field
looked like. We'd all seen the wells. Our resource evaluation
group was to confirm about what the reserves are. I mean 130
million barrels. We can get as high as 160. But the discussion
really was how to get the field developed. What's a reasonable
amount of time. BP provided a development plan or a plan of
development, a proposed plan of development. We talked to BP,
worked with our technical people, revised that technical plan.
That's all in your book there and you can sort of see our thinking
as the 3-D seismic survey to delineate or get rid of that southern
lease. Show us there's something going to come off that lease or
get rid of it. How can you afford on these leases you know have
oil on it. There isn't any question about it.
We looked at a reasonable plan development, we believe, and I
still believe that, and you'll see in the third quarter, no it was
the first quarter - April of 1998 call was the date we said that's
the day you're either going to be - some certainty of going into
production or we're going to start talking about the unit back.
That's the way the discussion went.
CHAIRMAN LEMAN:
I think you probably understand our frustration and I think
maybe you share it. You kind of get to a point where a good
company, a good partner in Alaska, says well, we can make money.
It's not uneconomic, but we're not going to do it unless we make
these changes no these terms. Kind of puts us in a box, because if
it's delayed, there's ramifications to that. It increases the cost
and it's just one of those situations where you kind of get
yourself boxed in and if you go back and say what decisions led to
this, those are some of the them. John says you don't have all the
information at that time and you can only make the decisions on the
best information you have, so...
COMMISSIONER SHIVELY:
I'd like to say BP didn't have to be this aggressive, either.
They've taken a very aggressive look at the field which I think is
one of the things that intrigued us. We had to look at the fact
situation before us when they came to us. And you're right. I
felt the same last summer and this fall as you are feeling now
about making these choices and it's one of the reasons I felt the
decisions we made needed to be reviewed by a public body is because
it is a tough choice that we've been put in here. And we've made
the decisions that we think are correct and we're trying to lay out
the difficulties we had in reaching that and you're going to have
to make some of those same decisions.
CHAIRMAN LEMAN:
Patrick, do you want to try a question? This has to do with
your testimony. I'm almost done. Don't have any more cookies.
Robin? Joe? Any more questions?
SENATOR TAYLOR
The only other question I had would have been a follow up on
John's comment and that is that I - his inability to make the
finding that it was noneconomic generated a situation where a
decision had to be made. I still don't think there's a legal basis
for this proposition. I appreciate the prudence that's being
offered, but I still don't think we have a role to play here. I
know it makes everyone more comfortable if we do. It certainly
doesn't make anyone more comfortable if we don't and I just reflect
upon it with Benjamin Franklin's great, great quote, "These are the
times that men plow quietly in the field and women weep silently in
their kitchens and the legislature is in session and no man's life
or property is safe." There's a lot of places you could have
placed this decision and I don't know where's the best spot to have
it.
COMMISSIONER SHIVELY:
Mr. Chairman, I think that's precisely because there were some
questions about the legal authority to do this. This is why we
think legislative confirmation resolves the situation.
CHAIRMAN LEMAN:
Patrick, in your testimony of March 30 you indicated that all
bidders in the 1979 lease sale were on notice because of provisions
in the lease form that at some point in the future the State's
stake in royalty could be reduced from the terms of the contracts
and they all bid on that basis. The question was paragraph nine of
the 1980 lease which is entitled "Reduction of Royalty" in case you
don't remember what paragraph nine is. We're not trying to trick
you; we're just trying to see how good your memory is. It's
usually real good. Anyhow, reduction of royalty, the lease
provision you were referring to in your statement that all lessees
were on notice of the potential to pay reduced royalties. Is that
what you were referring to?
PATRICK COUGHLIN, Deputy Director, Division of Oil and Gas:
Yes, that's right.
CHAIRMAN LEMAN:
Did you mean to equate notice of potential royalty relief
after two years of production with the possibility the lessee could
renegotiate the competitively bid net profit share, particularly
where there has been no production.
MR. COUGHLIN:
No, I simply meant that there wasn't in the law, in the
leases, that there was some form of royalty relief that had been
available at some point in the development of the field.
MR. BOYD:
The answer to Senator Frank's question is yeah, people do
explore before they lease. People go out and shoot seismic. We
have thought that before. I worked for Marathon when this lease
was being offered and it was one our best prospects and we had shot
seismic and we did know generally the shape and size of it.
CHAIRMAN LEMAN:
Knowing what you today from the experience you've had over the
last 17 years, would you ever recommend a net profit share leasing
arrangement?
MR. BOYD:
Mr. Chairman, I remember the vice president of our company
writing a letter to whoever then was the governor saying don't ever
do this again. Just stop doing it. His name was Ron Burk and I
would call him here except he's dead.
CHAIRMAN LEMAN:
One last one I have and it's one I asked you earlier today,
John. I could also ask Eric, also. In negotiations I know you're
probably looking at different things and reacting to different
things. As I would look at it to say over here is estimated value
used based on model of what's coming from the field and timing and
there's that value and if we change it, here's a value over here.
Why didn't you work to get those two values to be equal. I think
they're pretty close, but it seems to me they would have been an
easier sell to the Anchorage Daily News. This is for Stan Jones to
see if he's still awake, but wouldn't it have been an easier sell
to say, look, we're changing the arrangements to create a better
alignment which I think makes sense. To change some alignments,
but divert them so they're equal and I know if you look at the
model and we can delay it three years because if we don't make this
change, then it's within $4 million which for practical purposes is
probably a wash. So maybe in your mind you're there, but...that
really wasn't a basis you were looking at in the negotiations.
COMMISSIONER SHIVELY:
The problem was we sort of became, as I think you often do in
negotiations, more sophisticated as you go along. We first
concentrated on the rate of return when we looked at the numbers
and that almost ended the negotiations when we saw what we thought
the rate of return was with the net profits. Because we recognized
that it was a very decent field. We sort of got beyond that, but
we really measured for most of the negotiations against the figure
that we - net profits assuming that the field would be developed on
the same time frame on the net profits as the supplemental royalty.
And that was a figure that ...
TAPE 46-48, SIDE A
...but we really didn't use that as a negotiating number.
CHAIRMAN LEMAN:
One other question I've had, and I don't think I've asked it
yet, is why did you truncate the supplemental royalty at 27.5
percent when it would seem to me that as you climb for each dollar
a barrel that there may be, I don't know that it's ever going to
get that high, but if it did, wouldn't it make sense to track even
higher than we are at 27.5 percent?
COMMISSIONER SHIVELY:
We were very far apart on some of the numbers very early on.
Basically, we adjusted that formula as--what I told BP is, as well
as protecting the 20 percent base royalty, which as far as I was
[indsc.] never up for negotiation. We had to, out of the
supplemental royalty, get what I thought was real money. They
would have preferred not to give any real money, to say 20 percent
is a good return, and if things go exceptionally well with prices,
Eric can contradict me if I'm overstating their position, then
maybe the State gets something. We didn't believe that was good
enough. And we negotiated that formula; we negotiated over where
you started, we negotiated how it went up, we negotiated how high
you could go, and ultimately we talked about a figure that I felt
was what I wanted, which was the $37,000,000.00, and we adjusted
the formula to get that $37,000,000.00 when we agreed on that.
They always wanted the cap, and it was sort of where it was and
where it started and how you went up that we negotiated.
MR. LUTTRELL:
Just to add one point to that, I mean the amount of money that
comes from a higher cap and the way we were running the mathematics
didn't have very much impact at all, as I recall. If the [indsc.]
cap had been higher, it had very little impact on the overall
dollar figure that you were looking for.
CHAIRMAN LEMAN:
Kevin, we've got everybody else up, why don't you come up here
and just answer one question. Of all the people in the department,
you seem to escape the politics of the legislature, and for that we
thank you, and you've probably been one who's looked at the numbers
and the model and everything and you're going to go through that
with us more in detail. Is it the next meeting we have? I think
next Thursday is our plan, so you can spend more time then, but can
you just tell us tonight, in your opinion you looked at it all, is
this a good deal for the State of Alaska?
KEVIN BANKS, PETROLEUM ECONOMIST, DEPARTMENT OF NATURAL RESOURCES:
Mr. Chairman, for the record I'm Kevin Banks--
CHAIRMAN LEMAN:
A real easy question.
MR. BANKS:
--Petroleum Economist. Someone asked me that question last
night, and I responded and then later thought--rather facetiously
thought, "Well, isn't that for you to decide," would have been the
answer to make. And I think that is true. I would hope that the
legislature will come to the same conclusion that we did. And for
my own part, I think this deal is, as I say, it's an okay deal for
the State. There is a certain amount of certainty associated with
the supplemental royalty paying something to us and, I believe, at
least greater certainty that the net profit share offered to us.
And I also believe that the supplemental royalty--the state has the
opportunity to make revenues off of a supplemental royalty sooner
than the net profit share would kick in, if at all. For those
reasons, and together with the fact that if BP will get this
project going now, and would not have been able to get it going now
under the current system, that would also have ancillary benefits
to the State, in terms of jobs and early revenue from royalties and
taxes. So my answer is, "Yes, I think this is an okay deal for the
state", and I think we did a pretty good job.
CHAIRMAN LEMAN:
Any questions of any of these gentlemen? Senator Taylor?
SENATOR TAYLOR
Just that last one. The question you asked was, "Is this a
good deal?" for the state. The answer was, "This is an okay deal
for the state." Is there some reason you don't choose to use the
adjective the chairman did?
MR. BANKS:
Yes there is, Senator Taylor. I think it has to do with the
fact that the net profit share has considerable up-side for the
state. If there's any change in the economics of the field that
improves, if prices are consistently higher, for example, or if
production is any higher. As some of the materials that we sent
over to you earlier today would indicate, the net profit share
really pours in. By the same token, it's exactly the problem that
BP has with it: that for any increase in the quote benefits that
might be associated with the higher production rates or higher
prices, or some other economic feature, the state gets all of it,
virtually all of it. And it has a fairly serious impact on the
economics and the incentives for incremental kinds of projects for
the company. And that's why I say it's "okay". There is a high
side to this that I think we can't ignore.
CHAIRMAN LEMAN:
Further questions? I'll just note that the next committee
meeting will be next Wednesday at 3:30. The schedule will be
posted tomorrow, and the next meeting on SB 318 will be next
Thursday, and we will be taking up the state's model and fiscal
considerations. Do you expect that any of that will need to be
done in confidential session, or everything we'll be doing next
Thursday will be public meetings?
MR. LUTTRELL:
I think I'd like to get back to you with that, Mr. Chairman.
CHAIRMAN LEMAN:
Okay, I have Thursday--oh, I have a few more questions from
the Department of Law. Is anybody here from the Department of Law?
Okay. I'd though they'd have somebody here today. But the
Attorney General and Jim Baldwin couldn't be at this meeting, so I
told them we'd just--I had about three more questions for them.
And your model, and then--I'd like to, if we could, spend a little
bit of time, so committee members will understand the net profit
accounting system, allowable deductions, etcetera, maybe we could
spend a few minutes on that. If you can have a graphic to show
clearly those things, that would make it even easier to understand.
Senator Taylor?
SENATOR TAYLOR
I just wanted to let you know, for your future scheduling on
this bill, that I'm going to be in D.C. on the 18th and the 17th of
April, but I will be available for your week of hearings on this
[indsc.].
CHAIRMAN LEMAN:
Well, if you're going to work on this bill then, you're going
to have to go up to the Finance Committee or over in the house by
then.
SENATOR TAYLOR
Oh really? Oh.
CHAIRMAN LEMAN:
That's just a subtle hint about--
SENATOR TAYLOR
I just wanted you to know where I'll be.
CHAIRMAN LEMAN:
--about anticipated schedule. I'm hoping, I think we've
distributed the schedule. We'll wrap up questions, if necessary,
on Saturday the 13th, and then start taking, maybe complete taking
public testimony. I'd like to do that meeting in Anchorage on the
13th, but it looks very likely that it will be here, because I
think we'll be in session on that day. So just for planning
purposes, he'd like to be in Anchorage on the 13th, and would just
as soon do it there, and he knows a lot of other people probably
it's more convenient to be there. But we're going to have to flex
with the schedule that we have here. There being no further
business to come before us, we're adjourned.
[Senate Resources Committee adjourned at 8:50 p.m.]
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